It’s Now Easier for China’s Middle Class to Invest Overseas

It’s Now Easier for China’s Middle Class to Invest Overseas

For many years it has been relatively easy for the very wealthy in China to invest outside China, either through their businesses or informal channels. However, for the new middle class, it has been much harder.

While an increasing number of Chinese middle class consumers have traveled abroad, they’ve had fewer options to diversify their investments into assets outside China.

In early 2016 that has changed. Through the launch of the Mutual Recognition of Funds (MRF), several Hong Kong-based funds will be made available to mainland Chinese investors. The 3 pilot funds (likely soon to be joined by many more) come from JP Morgan, Hang Seng and Zeal.

To reach Chinese investors, Zeal, for example, will market its funds to Tianhong’s 200 million fund customers. Tianhong is one of China’s largest fund managers. The minimum investment will only be a few US$.

This will be good news not just for Chinese investors. It has to be good for international fund managers who will increase their funds under management, and for international investors who should benefit as Chinese demand drives up the price of their financial assets.

And less directly, it is good for the Chinese government: allowing overseas investment will be popular, and encouraging the middle class to diversify their investments away from property reduces everyone’s dependence on real estate values.

MRF is a two-way process. A number of mainland funds are being made available to non-Chinese investors for the first time. If you are a bold investor, this might be something to add to your portfolio in 2016. If you do, I hope you enjoy volatility.

The big caveat

But while this is all quite exciting and positive, there is of course a risk that this openness to cross border investing goes away again during 2016.

Why? Because China’s exchange rate continues to weaken and is seen by many now as very much a one way bet in the mainland today. Somewhere between $100 and $200 billion US dollars left China in December, and the trend seems likely to continue in January. The Chinese government does have levers it can use to resist this.

Firstly, it can better communicate to the market what its intentions with the exchange rate are.

Secondly, it can use some of its over $3 trillion of foreign reserves to support the exchange rate.

And thirdly, it could impose tighter capital controls to restrict the flow of money of China. These controls existed in the past, and while it might be painful and a loss of face for the government to bring them back, if they have to they will.

And of course, understanding that this might happen tomorrow, just accelerates the flow of money out of China today.

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